Lawrence Summers on the U.S. Economy

by Doug Gavel, interviewed Feb. 4, 2014

The US economy continues its sluggish recovery from the Great Recession, with the unemployment rate inching down and the housing market rebounding, but many are still concerned with the vast numbers of Americans out of work, and the very slow growth of the GNP. Lawrence Summers, Charles W. Eliot University Professor of Harvard University and director of the Mossavar-Rahmani Center for Business and Government, is the former Secretary of the Treasury who served as director of the National Economic Council for the Obama Administration from 2009 to 2011.

Q: You have written recently of the fact that the US and global economics seem to be entering a time of "secular stagnation." Please explain the components of this phenomenon.

Summers:
We’ve been in a period for some time now where it’s appeared almost impossible to have reasonable growth with reasonable interest rates. The economy has been in recession and its aftermath for the last five years. The share of adult men working right now is barely different than it was five years ago, having dropped off a cliff during 2008. And if you look even before then, the economy did grow at a reasonable rate, but only when it was being fueled by the mother of all housing bubbles, vast erosion of credit standards, excessive borrowing and lending. And so the phenomenon is a real difficulty, as the economy seems to be currently structured in the United States and throughout the industrialized world in generating adequate growth rates along with interest rates that are consistent with a good chance of financial stability. That’s the phenomenon of secular stagnation.

Q: Is secular stagnation just an American problem?

Summers:
No, it’s an issue throughout the industrialized world. You see that in the dismal rates of growth, along with very low interest rates, not just in the United States but in Europe and Japan as well. It’s not dominantly a problem in emerging markets where demand appears to be quite strong, but emerging market reserve accumulation, which is associated with very substantial trade surpluses from some emerging markets, is probably one of the factors that has contributed to secular stagnation in the industrial world.

Q: What are the policy tools available for policymakers to address secular stagnation?

Summers:
Fundamentally, we will choose between three options: The worst is to simply do nothing and wait for potential to decline to the level of actual GDP, as capital investment is diminished, as workers who are unemployed for a long time drop out of the labor force. A second approach that’s better than doing nothing is to rely on monetary policy to do its best to create negative real interest rates, or to hold down risk premiums on long-term financial assets, and basically try to create demand in that way. That’s a problematic strategy. It’s better than nothing, but it has the problem that investments that people are prepared to make at a zero interest rate, that they weren’t prepared to make at a one percent interest rate, probably aren’t very attractive investments. It has the problem that zero nominal interest rates, or near zero nominal interest rates, or negative real interest rates tend to be associated with reaching for yield with risk-seeking, with Ponzi schemes, with financial bubbles. And it’s got the question that there are issues of just how much extra investment can be stimulated by the provision of more and more liquidity past a certain point.

So, those monetary strategies are better than nothing, but probably the best strategy is to seek to increase private spending at any given level of interest rates. The best way to do that is to increase public investment. Alternatives include reducing regulations that inhibit a great deal of private investment, doing more to promote consumer spending. The reality is that if one person saves more, they end up accumulating more wealth, but since my spending is your income, if everyone tries to save more, ultimately the community can end up with less wealth. And, so, spurring demand, spurring spending is central to resisting secular stagnation.

Q:  You have spoken in some detail on the need for policymakers to address the challenge of income inequality, specifically in terms of "inclusive prosperity." How can that challenge be met?

Summers:
There are many aspects to this issue. Education is a crucial aspect; the creation of jobs for those who are more likely to work with their hands – construction is a major example – through public investment is another. But increasingly, I believe that a better, more functioning progressive tax system has to be crucial as inequality increases. Vast amounts of the income and wealth of those with the highest incomes escape taxation completely because of a range of shelters. As just one example, if you look at the profits of U.S. companies, they show up with the most profits, not in places like China, or Japan, or Germany where the economy is largest, but instead in places like Ireland and the Netherlands and the Cayman Islands where the tax system is most attractive. We’ve got to find ways to cooperate internationally so that we can tax mobile capital. We’ve got to close a whole range of special features in the U.S. tax code that allow wealth to be accumulated, to earn income, and be passed on to heirs with very little taxation.

Q: You chaired The Lancet Commission on Investing in Health. Its recent report emphasized the possibility of achieving dramatic gains in global health by 2025 through a grand convergence. Tell us about the key findings in the report and how you ended up chairing this commission.

Summers:
I’m an economist, a global financial person, but I’ve always believed very strongly in global health. When I was chief economist at the World Bank 20 years ago, we chose health care as the topic for the World Bank’s annual world development report because we believed there were enormous gains to be made from taking an economic and an analytical approach to diseases in the developing world. The report was very successful. In fact, Bill Gates has said it was the report that got him interested in the subject of global health.  And so The Lancet, a prestigious British medical journal, asked me and my colleagues who had worked on that report to form a commission to look at the issues that it had raised, 20 years later.

And among those issues, the most important finding of the report is that we can achieve grand convergence. What does that mean? If you look at most of human history, life expectancy was short everywhere. Three in 10 babies died before the age of five, life expectancies were below 40. Beginning in about 1800, you started to see a large-scale divergence with life expectancies rising very fast in the countries that had industrialized.

Here’s what’s possible now: We can achieve, on a global basis, child mortality rates like those we saw in the United States and Great Britain within my lifetime in the 1980s, in the next generation. We can see rates of AIDS, globally, brought down to levels more typical of the industrialized world in recent years. We can see, essentially, an end to infectious disease as a large killer. This is the one generation that has the opportunity to bring convergence in health, all over our planet; only this time upwards convergence to high life expectancy and low mortality rates, rather than the convergence that we’ve seen through most of human history.

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